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Franking credit proposal to cost SMSFs $11k-plus: report

Based on ATO statistics, the SMSF Association has estimated that Labor’s proposal to remove refundable franking credits could impact up to 60.7 per cent of SMSFs in the next 10 to 15 years at an average cost of $11,577 per fund.

In a submission to the inquiry into refundable franking credits being undertaken by the standing committee on economics, the SMSF Association highlighted that the Australian Labor Party (ALP) has overestimated the revenue it will collect from this measure and that it will not target the wealthiest SMSFs as intended.

Based on ATO statistics for the 2014-15 financial year, 311,121 SMSFs utilised franking credits with an average deduction of $11,577 per SMSF and a median value of $5,155 per SMSF, the submission stated.

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“More specifically, as of June 2016, 47 per cent of funds are in retirement phase or 267,000 funds. With 60.7 per cent of SMSF members aged over 55, there is approximately 677,000 members either currently affected or will be in the coming 10 to 15 years as they enter retirement phase,” said the submission.

The statistics also show that 245,392 members have average income streams less than $58,000 and the overall average income stream for these members is $39,936, it said, indicating that the refund of franking credits may form a significant portion of their income.

“With the average asset allocation to listed shares at 31 per cent of SMSF assets and the fact that 62 per cent of funds are invested in listed shares, this is a far-reaching issue,” the submission said.

The ATO statistics indicate that SMSFs in retirement phase have an even higher allocation to listed shares than SMSFs in accumulation phase, which worsens the impact.

“Individuals in retirement phase who have a nil tax rate will lose 30 per cent of their share income,” it said.

The submission also pointed out that while the ALP has stated the policy will target the wealthiest 10 per cent of SMSFs receiving 50 per cent of all refundable franking credits, the introduction of the transfer balance cap last year has “severely limited” the amount that is paid to this 10 per cent.

“In fact, the largest 10 per cent of SMSFs, which encompass funds with assets over $2.4 million, will now be paying tax at 15 per cent on earnings on assets over the $1.6 million limit and, in many circumstances, will still receive the majority value of their franking credits as they use them to reduce the tax liabilities on their earnings,” the submission explained.

SMSFs with assets below $1.6 million and do not receive the age pension, on the other hand, will lose 100 per cent of their franking credit refunds and approximately 10 per cent of their income, it said.

The submission included an example which showed that an SMSF with $900,000 entirely in pension phase would see a 14.2 per cent reduction in income from this proposal, versus an SMSF with $1.6 million in pension phase and $8.4 million in accumulation that would only see a 4.3 per cent reduction in income. This is calculated on a 40 per cent allocation to Australian shares and a 5 per cent return for both funds.